Abstract
Agents with declining discount rates who are unable to commit to their future decisions can either be sophisticated—meaning that they anticipate their future behavior and take it into account in their consumption choices—or naive. Previous studies have shown that sophistication may lead to higher or lower consumption rates, but have not resolved the implications for welfare, arguably the most important question from an economic point of view. Since neither the sophisticated nor the naive solutions are Pareto-efficient, their own welfare ranking is not obvious. This paper shows that the ‘better saver’ amongst the two (lower consumption rate) is always better-off, from all temporal perspectives.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.